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June 15, 2005
Mr. Brian Cascio
Accounting Branch Chief
United States Securities and
Exchange Commission
Division of Corporate Finances
450 Fifth Street, N.W.
Washington, DC 20549
Re: Audiovox Corporation
Form 10-K for the fiscal year ended November 30, 2004
Filed March 31, 2005
Form 10-Q for the fiscal quarter ended February 28, 2005
File No. 1-09532
Dear Mr. Cascio:
This letter is being submitted in response to the comments set forth in the
Staff of the Division of Corporate Finance's (the "Staff") letter dated May 31,
2005, with respect to the above-referenced filings (the "Comment Letter"). The
responses to the Comment Letter regarding the aforementioned filings appear
below.
The following numbered paragraphs, which correspond to the number paragraphs of
the Comment Letter, set forth our responses to the Staff's comments contained in
the Comment Letter.
Form 10-K for the Fiscal Year Ended November 30, 2004
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies and Estimates - Page 30
SEC Comment:
(1) We note your disclosure on Page 31 that reversals of previously established
sales incentive liabilities were $3,889 and $1,803 for fiscal years 2004
and 2003, respectively. We also note your disclosure on Page 40 that net
Mr. Brian Cascio
United States Securities
and Exchange Commission June 15, 2005 Page 2 of 7
income was favorably impacted by sales incentive reversals of $5,083 and
$2,940 for fiscal years 2004 and 2003, respectively. Please reconcile these
two amounts. Additionally, please tell us, in substantive detail, the
reasons for the significant increase in sales incentives reversals for
unearned and unclaimed sales incentives from fiscal year 2003 to 2004 and
how this impacts your ability to establish reasonable and reliable
estimates of your sales incentive liabilities.
Response:
The reconciliation of reversals of previously established sales incentives
liabilities is provided below:
Fiscal
Description 2004 2003
----------------------------------------------------------------------------------------------
Electronics (continuing operations - page 31) $3,889 $1,803
Wireless (discontinued operations - page 40) 1,194 1,137
----------------------------------------------------------------------------------------------
Consolidated reversals $5,083 $2,940
====== ======
As noted above, the reversals of previously established sales incentive
liabilities for the Electronics segment were included in the disclosures on page
31 (critical accounting policies and estimates) as these amounts were included
within net sales from continuing operations. The Company's consolidated
reversals, including the discontinued Wireless operations, were disclosed on
page 40 (MD&A discussion of net income).
The increase in sales incentive reversals from fiscal year 2003 to 2004 was due
to a $1,270 and $816 increase in unearned and unclaimed sales incentives from
continuing operations, respectively. The increase in the reversals of previously
established sales incentives is a direct result of the increase in the amount of
sales incentives being accrued to our customers in order to promote sales
growth, support new product offerings and remain competitive. The increase in
the reversals of unearned sales incentives was due to lower than expected
post-holiday sales and an overall reduction in sales from the Company's mass
merchants and retail customers that did not meet forecasted sales targets due to
economic conditions, competition and pricing pressures in the industry.
Accordingly, the actual sales related to certain customer programs did not meet
their estimated sales targets required to earn sales incentive funds. The
Company has a policy to reverse unearned sales incentive liabilities upon the
analysis of actual and subsequent sales data. Unearned sales incentives are
reversed into income in the period when the customer does not purchase the
required minimum quantities of the product during the specified time period.
The increase in unclaimed sales incentive reversals was due to the expiration of
certain sales incentive programs prior to the customer submitting a claim. The
Company's policy is to reverse earned but unclaimed sales incentive liabilities
upon the expiration of the claim period for each program. The Company believes
the reversal of previously established sales incentives liabilities is a
disciplined, rational, consistent and systematic method.
Mr. Brian Cascio
United States Securities
and Exchange Commission June 15, 2005 Page 3 of 7
The increase in reversals from fiscal 2003 to fiscal 2004 does not impact the
Company's ability to establish reasonable and reliable sales incentive
estimates, as the Company believes the provision for and reversal of sales
incentives is a disciplined, rational, consistent and systematic process. As
discussed in Note 1(g) of the Company's notes to the consolidated financial
statements, the process for establishing reliable estimates for sales incentive
liabilities is impacted by numerous external factors such as the purchasing
volume of our customers, the ability of our customers to achieve their sales
targets and the timely submission of sales incentive claims by our customers
prior to the expiration date of the claim period. Although the Company makes its
best estimate of its sales incentive liability, external factors may impact the
Company's actual sales incentive liability and reported operating results.
Consolidated Financial Statements
Note 17 - Contingencies - Page 100
SEC Comment:
(2) We note disclosures related to multiple outstanding litigation that "no
assurances regarding the outcome of this matter can be given at this point
in the litigation." We also note your general disclosure that "the outcome
of all pending legal proceedings in the aggregate is unlikely to have a
material adverse effect on the business or consolidated financial
condition." Please tell us and disclose more details in future filings of
the status of the litigation matters and why you believe that they will not
have a significant impact on the financial statements. In addition, as
discussed in SAB 5Y, a statement that a contingency is not expected to be
material does not satisfy the requirements of SFAS 5 if there is at least a
reasonable possibility that a loss exceeding amounts already recognized may
have been incurred and the amount of that additional loss would be material
to a decision to buy or sell the registrant's securities. In that case, the
registrant must either (a) disclose the estimated additional loss, or range
of loss, that is reasonably possible, or (b) state that such an estimate
cannot be made. Please respond to us supplementally and revise future
filings to comply.
Response:
The Company considers the following factors in determining whether accruals or
disclosures are required for pending litigation matters: the date of the
occurrence and the cause of action; the degree of probability of an unfavorable
outcome and the ability to reasonably estimate the amount of loss. In evaluating
the probability of an unfavorable outcome for asserted claims, the Company
considered the nature of the litigation, the progress of the case (includes
progress after the date of the financial statements but before the issuance of
the financial statements), opinions and views of our legal counsel and how the
Company intends to defend or respond to the lawsuit. If management determines,
Mr. Brian Cascio
United States Securities
and Exchange Commission June 15, 2005 Page 4 of 7
based on the underlying facts and circumstances, that it is probable a loss will
result from a litigation contingency and the amount of the loss can be
reasonably estimated, the estimated loss is accrued for.
The Company believes the specific litigation matters disclosed in our fiscal
2004 Form 10-K will not have a material adverse effect on the Company's
financial statements, individually or in the aggregate, at the time of the
filing. Even though the possibility of an unfavorable outcome is reasonably
possible for any one of these claims, the range or amount of loss, if any,
cannot be reasonably estimated at this stage of the specific litigation. The
majority of these asserted claims are in the early discovery stages of
litigation or covered by insurance policies and each case was reviewed by legal
counsel. In addition, management evaluated and reviewed these claims with the
criteria of SFAS 5. As the estimated loss or range of loss for each asserted
claim could not be reasonably estimated at the time of filing as a result of
consultation with legal counsel, such information was not disclosed.
For future filings, the Company will continue to update and evaluate the status
of each case and enhance the financial statement disclosures in order to address
the impact on the Company's financial statements and the possible range of loss,
if such estimate can be made at that time. If no estimate of range or loss can
be determined, such fact will be disclosed.
Form 10-Q for the Fiscal Quarter Ended February 28, 2005
Item 4 - Controls and Procedures - Page 33
SEC Comment:
(3) Refer to your disclosures related to the material weaknesses identified in
your internal control over financial reporting as of February 28, 2005.
Supplementally and in future filings, please revise to discuss the impact
of the material weakness on financial reporting and the control
environment. Additionally, please tell us and disclose in future filings
whether your remediation measures have been implemented and when you expect
that the remediation of the material weaknesses will be complete.
Response:
Based on the material weaknesses identified during the Company's 2004 fiscal
year-end and the control deficiencies that continue to be characterized as
material weaknesses during the Company's first quarter ended February 28, 2005,
the Company's overall internal controls over financial reporting is determined
to be ineffective in accordance with the rules and regulations of the Securities
and Exchange Commission. As discussed in Item 4 on page 35, the Company states
that these control deficiencies are classified as material weaknesses as there
is a more than a remote possibility that a material misstatement to the
Company's interim or annual financial statements could occur. However, the
material weaknesses identified by management did not cause a material
misstatement or have an adverse impact to the Company's financial position or
results of operations during fiscal 2004 or the first quarter of fiscal 2005.
Mr. Brian Cascio
United States Securities
and Exchange Commission June 15, 2005 Page 5 of 7
Based on the nature and extent of the material weakness identified, these
deficiencies did impact the Company's financial reporting to the extent that
certain controls were put into place to address the specific material
weaknesses.
The Company's control environment reflects the tone set by top management and
the overall attitude, awareness and actions of the board of directors,
management, process owners and others concerning the importance of internal
control as well as the emphasis placed on the control in the Company's policies,
procedures, methods and organizational structure. These four material weaknesses
impacted the Company's control environment to the extent that it increased the
awareness of fraud and business risk by the board of directors, management and
the process owners. No significant impact to the Company's control environment
was otherwise noted.
As discussed in Item 4 on page 35, these control deficiencies have either been
remediated or are in the process of being remediated subsequent to February 28,
2005, and before the issuance of the Quarterly Report on Form 10-Q. To date,
certain of the remediation plans are operating and other remediation plans are
currently being implemented and are expected to be completed and fully
implemented before the end of fiscal 2005.
For future filings, the Company will continue to discuss the impact of the
material weaknesses on our financial reporting and control environment and the
status of implementing our remediation measures.
SEC Comment:
(4) As a related matter, we note your disclosure that "there has been no
significant change in the company's internal control over financial
reporting during the most recently completed fiscal quarter that has
materially affected or is reasonably likely to materially affect our
internal control over financial reporting." You then disclosure certain
changes to the design and operation of internal control during the first
quarter. Supplementally and in future filings please clarify whether there
were any changes in your internal control over financial reporting that
occurred during this quarter that have materially affected, or are
reasonably likely to materially affect, your internal control over
financial reporting.
Response:
To clarify our disclosures in the Quarterly Report on Form 10-Q for the fiscal
2005 first quarter ended February 28, 2005; the Company asserts that there were
no changes to its internal controls over financial reporting that occurred
during the fiscal 2005 first quarter that would materially affect, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
Supplementally, the Company made changes to some lower level ancillary controls
during the fiscal 2005 first quarter that are not considered material, or
significant to the company's internal controls over financial reporting or that
are reasonably likely to materially affect the Company's internal control over
financial reporting. As noted in our response to Comment #3, the Company has
Mr. Brian Cascio
United States Securities
and Exchange Commission June 15, 2005 Page 6 of 7
implemented, or is in the process of implementing, new internal control changes
to remediate control deficiencies.
For future filings, the Company will clarify its disclosures concerning material
changes in its internal controls over financial reporting that occurred, or are
reasonably likely to materially affect its internal controls over financial
reporting, during the quarter.
Mr. Brian Cascio
United States Securities
and Exchange Commission June 15, 2005 Page 7 of 7
If you have any additional comments or should you require any supplemental
information, please do not hesitate to contact me.
Sincerely,
/s/ Charles M.. Stoehr
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer